What is an IPO ?
IPO or Initial Public Offer is a way for a company to raise money from investors
for its future projects and get listed to Stock Exchange. Or An Initial Public Offer
(IPO) is the selling of securities to the public in the primary stock market.
Company raising money through IPO is also called as company ‘going public'.
From an investor point of view, IPO gives a chance to buy shares of a company, directly
from the company at the price of their choice (In book build IPO's). Many a times
there is a big difference between the price at which companies decides for its shares
and the price on which investor are willing to buy share and that gives a good listing
gain for shares allocated to the investor in IPO.
From a company prospective, IPO help them to identify their real value which is
decided by millions of investor once their shares are listed in stock exchanges.
IPO's also provide funds for their future growth or for paying their previous borrowings.
Who decides the Price Band?
Company with help of lead managers (merchant bankers or syndicate members) decides
the price or price band of an IPO.
SEBI, the regulatory authority in India or Stock Exchanges do not play any role
in fixing the price of a public issue. SEBI just validate the content of the IPO
Companies and lead managers does lots of market research and road shows before they
decide the appropriate price for the IPO. Companies carry a high risk of IPO failure
if they ask for higher premium. Many a time investors do not like the company or
the issue price and doesn't apply for it, resulting unsubscribe or undersubscribed
issue. In this case companies' either revises the issue price or suspends the IPO.
Who decides the date of the issue?
Once ‘Draft Prospectus' of an IPO is cleared by SEBI and approved by Stock
Exchanges then it's up to company going public to finalize the date and duration
of an IPO. Company consult with the Lead Managers, Registrar of the issue and Stock
Exchanges before decides the date.
What is the role of registrar of an IPO?
Registrar of a public issue is a prime body in processing IPO's. They are independent
financial institution registered with SEBI and stock exchanges. They are appointed
by the company going public.
Responsibility of a registrar for an IPO is mainly involves processing of IPO applications,
allocate shares to applicants based on SEBI guidelines, process refunds through
ECS or cheque and transfer allocated shares to investors Demat accounts.
What is the role of Lead Managers in an IPO?
Lead managers are independent financial institution appointed by the company going
public. Companies appoint more then one lead manager to manage big IPO's. They are
known as Book Running Lead Manager and Co Book Running Lead Managers.
Their main responsibilities are to initiate the IPO processing, help company in
road shows, creating draft offer document and get it approve by SEBI and stock exchanges
and helping company to list shares at stock market.
What is Follow on public offering or FPO?
Follow on public offering (FPO) is public issue of shares for already listed company.
What is primary & secondary market?
Primary market is the market where shares are offered to investors by the issuer
company to raise their capital.
Secondary market is the market where stocks are traded after they are initially
offered to the investor in primary market (IPO's etc.) and get listed to stock exchange.
Secondary market comprises of equity markets and the debt markets.
Secondary market is a platform to trade listed equities, while Primary market is
the way for companies to enter in to secondary market.
What is the life cycle of an IPO prospectus?
1: Draft Offer
"Draft Offer document" is prepared by Issuer Company and the Book Building Lead
Manager of the public issue. This document is submitted to SEBI for review. After
reviewing this document either SEBI ask lead managers to make changes to it or approve
it to go ahead with IPO processing. "Draft Offer document" is usually a PDF file
having information of an investor who needs to know about the public issue. It mainly
contain information about the company, its business, management, risk involve in
applying to this issue, company financials and the reason why company is raising
money through IPO.
Stage 2: Offer
Once the ‘Draft Offer document' cleared by SEBI, it becomes "Offer Document".
Offer Document is the modified version of ‘Draft Offer document' with SEBI
"Offer Document" is submitted to the registrar of the issue and stock exchanges
where Issuer Company is willing to list.
Stage 3: Red Herring
Once "Offer Document" gets clearance from Stock Exchanges, Issuer Company add Issue
size and price of the issue to the document and make it available to the public.
The issue prospectus is now called "Red Herring Prospectus".
What is the life cycle of an IPO?
Below is the detail process flow of a 100% Book Building Initial Public Offer IPO.
This process flow is just for easy understanding for retail IPO investors. The steps
provided below are most general steps involve in the life cycle of an IPO. Real
processing steps are more complicated and may be different. Please visit SEBI website,
stock exchange website or consult an expert for most current information about IPO
life cycle in Indian Stock market.
1. Issuer Company
- IPO Process Initialization
1. Appoint lead manager as book runner.
2. Appoint registrar of the issue.
3. Appoint syndicate members.
2. Lead Manager's
- Pre Issue Role - Part 1
1. Prepare draft offer prospectus document for IPO.
2. File draft offer prospectus with SEBI.
3. Road shows for the IPO.
3. SEBI –
1. SEBI review draft offer prospectus.
2. Revert it back to Lead Manager if need clarification or changes (Step 2).
3. SEBI approve the draft offer prospectus, the draft offer prospectus is now become
4. Lead Manager
- Pre Issue Role - Part 2
1. Submit the Offer Prospectus to Stock Exchanges, registrar of the issue and get
2. Decide the issue date & issue price band with the help of Issuer Company.
3. Modify Offer Prospectus with date and price band. Document is now called Red
4. Red Herring Prospectus & IPO Application Forms are printed and posted to syndicate
members; through which they are distributed to investors.
5. Investor –
Bidding for the public issue
1. Public Issue Open for investors bidding.
2. Investors fill the application forms and place orders to the syndicate members
(syndicate member list is published on the application form).
3. Syndicate members provide the bidding information to BSE/NSE electronically and
bidding status gets updated on BSE/NSE websites.
4. Syndicate members send all the physically filled forms and cheques to the registrar
of the issue.
5. Investor can revise the bidding by filling a form and submitting it to Syndicate
6. Syndicate members keep updating stock exchange with the latest data.
7. Public Issue Closes for investors bidding.
6. Lead Manager
– Price Fixing
1. Based on the bids received, lead managers evaluate the final issue price.
2. Lead managers update the 'Red Herring Prospectus' with the final issue price
and send it to SEBI and Stock Exchanges.
7. Registrar -
Processing IPO Applications
1. Registrar receives all application forms & cheques from Syndicate members.
2. They feed applicant data & additional bidding information on computer systems.
3. Send the cheques for clearance.
4. Find all bogus application.
5. Finalize the pattern for share allotment based on all valid bid received.
6. Prepare 'Basis of Allotment'.
7. Transfer shares in the demat account of investors.
8. Refund the remaining money though ECS or Cheques.
8. Lead manager
– Stock Listing
1. Once all allocated shares are transferred in investors dp accounts, Lead Manager
with the help of Stock Exchange decides Issue Listing Date.
2. Finally share of the issuer company gets listed in Stock Market
What is the difference between Book Building Issue and Fixed Price Issue?
Initial Public Offering can be made through the fixed price method, book building
method or a combination of both.
Difference between shares offered through book building and offer of shares through
normal public issue (Source: BSE):
What is the difference between Floor Price and Cut-Off Price for a Book Building
Company coming up with Book Building Public Issue decided a price band for the issue.
The price band usually contains an upper level and a lower level.
Floor Price is the minimum price (lower level) at which bids can be made for an
Investors can bid for the Book Build IPO at any price in the price band decided
by the company. In Book Build process retail investors have an addition option to
choose "Cut-Off" price for bidding.
Cut-off price means the investor is ready to pay whatever price is decided by the
company at the end of the book building process. Retail investor has to pay the
highest price while placing the bid at Cut-Off price. If company decides the final
price lower then the highest price asked for IPO, the remaining amount is return
to the retail investor.
What is the difference between retail investor, Non-institutional bidders and Qualified
Institutional Bidders (QIB’s)?
Investors can apply for shares in an IPO in 4 different categories:
1. Retail Individual
In retail individual investor category, investors can not apply for more then Rs
two lakh (Rs 2,00,000) in an IPO. Retail Individual investors have an allocation
of 35% of shares of the total issue size in Book Build IPO's. NRI's who apply with
less then Rs 2,00,000 /- are also considered as RII category.
2. High Networth
If retail investor applies more then Rs 2,00,000 /- of shares in an IPO, they are
considered as HNI.
Individual investors, NRI's, companies, trusts etc who bid for more then Rs 1 lakhs
are known as Non-institutional bidders. They need not to register with SEBI like
RII's. Non-institutional bidders have an allocation of 15% of shares of the total
issue size in Book Build IPO's.
4. Qualified Institutional
Financial Institutions, Banks, FII's and Mutual Funds who are registered with SEBI
are called QIB's. They usually apply in very high quantities. QIBs are mostly representatives
of small investors who invest through mutual funds, ULIP schemes of insurance companies
and pension schemes. QIB's have an allocation of 50% of shares of the total issue
size in Book Build IPO's. In a book built issue allocation to Retail Individual
Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional
Buyers (QIBs) is in the ratio of 35:15: 50 respectively. QIB's are prohibited by
SEBI guidelines to withdraw their bids after the close of the IPOs. Retail and non-institutional
bidders are permitted to withdraw their bids until the day of allotment.
As a retail investor
I want to apply more then Rs 1 lakhs in an IPO. Can I invest in Non-institutional
bidder’s category? If yes then what are advantages or disadvantages of this?
Yes, a retail individual investor can bid for more then Rs 1 Lakhs in an IPO by
applying in 'Non Institutional Investors' category. There is no upper limit for
bidding amount in 'Non Institutional Investors' category.
You can apply for more then Rs 1 Lakhs and may get much better allocation then a
Non-institutional bidders have an allocation of 15% of shares of the total issue
size in Book Build IPO's, while retail Individual investors has 35% (remaining 50%
is for QIB's). As Non-institutional category has much smaller in size, issue usually
oversubscribed much higher (then in retail category) and less shares allocation.
Is it mandatory to have PAN number to apply in an IPO?
Yes, Since July 2006, SEBI made PAN number mandatory for IPO applicants. Forms submitted
without PAN number or wrong PAN numbers are considered as faulty application and
they are not considered for IPO allotment. It's highly recommended that you double
check your PAN number information before submitting the IPO application form. If
you are filling the IPO application through online stock broker, make sure he has
How many days is the issue open?
(Information source SEBI) As per Clause 8.8.1, Subscription list for public issues
shall be kept open for at least 3 working days and not more than 10 working days.
In case of Book built issues, the minimum and maximum period for which bidding will
be open is 3 - 7 working days extendable by 3 days in case of a revision in the
price band. The public issue made by an infrastructure company, satisfying the requirements
in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21
working days. As per clause 8.8.2., Rights issues shall be kept open for at least
30 days and not more than 60 days.
What information should I keep after I submit the IPO application form?
This is a very important question for all IPO investors. If you are applying for
an IPO, make sure you retain following information for future correspondence with
the company or registrar of the issue.
1. Application form photo copy
2. Cheque photo copy
3. Application number in case of online IPO submission.